Opportunities in an online India

When I launched IndiaWorld, India’s first Internet portal, in March 1995, there existed neither any commercial Internet access nor any mobile operators in the country. At the time, I used to wistfully dream of an India where hundreds of millions of people could be online, and where a thriving entrepreneurial ecosystem could exist on the Indian Internet.

It’s been a long time coming. The start-up scene in India’s digital space has just started buzzing again now. The first instalment of such buzz happened a decade ago, just after I sold IndiaWorld in one of Asia’s largest Internet deals. At that time, though, both users and significant Internet use were missing.

Rajesh Jain

The situation is very different now. The Internet user base in India has grown from practically nothing to roughly 60 million—and these 60 million are doing more than just browsing for news and checking their email. The Internet, after all, isn’t just an amalgamation of mainstream portals any more.

Social networking, for instance, didn’t exist a decade ago—but now Facebook and YouTube are rapidly emerging as among the most accessed websites in India. The eternal search—for jobs, homes, spouses—is another big activity.

Transactions are a big driver this time around, simply because of the sheer convenience of buying (air, train, bus, movie) tickets, books and more, with a multitude of payment options.

Internet advertising in India now accounts for about Rs 800 crore, although half of that goes to Google for its search-linked advertising. But there is another advertising market that is a magnitude larger—and that, also, barely existed a decade ago. Mobile value-added services (VAS) account for a consumer spend of about Rs 7,500 crore. Its mobile user base being roughly 10 times its Internet user base, India is one of the few “mobile first, PC second” markets in the world.

These, then, are the two big digital gold mines—transactions and advertising. In the first case, consumers pay to reach businesses and obtain their products. In the second case, businesses pay to reach audiences. Both these markets will face challenges going ahead, and therein lies the new set of opportunities.

One of the challenges for advertising, for example, is, as I’ve mentioned, that the bulk of the money goes to Google and Yahoo, with Facebook likely to be another strong contender in the future. This leaves a much smaller pool of advertising money for local Indian companies.

In addition, the cost of selling Internet advertising is also high, should one choose not to rely on ad networks such as Google AdSense. For most advertisers, there’s little option but to build their own sales teams, which turn out to be expensive propositions.

In the mobile space, the operator is the enabler for almost all VAS revenue, and as such keeps the lion’s share of what end users pay. Again, this leaves much less money on the table for the content and services providers—less than what they’d like, of course, but also less than what they’d need to build large businesses.

Is there a way out?

One clear opportunity in India is in e-commerce. As the Internet user base grows, the convenience of shopping from one’s home, combined with attractive deals, will grow the market. The key factor here is the efficiency of the delivery chain—the logistical nitty-gritty. Some winners are already starting to emerge in the space, but these are early days yet.

The second opportunity will emerge in the mobile data space. With the combination of 3G networks, inexpensive smartphones with high-resolution screens (watch for Android to make a big impact in the coming months), and nearly flat-priced data plans (Rs 100 per month for almost unlimited usage), the data space is going to see rapid growth very soon.

The most obvious way to monetize new products is advertising, but a bigger opportunity will come, I think, from consumer micropayments. What is needed is a revenue-share model similar to that in app stores, where 70% of an end user’s payment goes to the app developer. In India, the figure for VAS is, on average, less than half of this. This needs to change, if there is to be a cycle of innovation that drives a new billion-dollar market.

Perhaps what India needs, in this regard, is the equivalent of i-mode. NTT Docomo’s i-mode service, launched in Japan over a decade ago, was a game changer in driving mobile data usage and creating a services ecosystem. By paying out as much as 91%, i-mode created terrific incentive for developers and content providers to create services for a growing base of consumers. That set up a positive feedback loop, propelling i-mode’s usage even further.

India needs something similar—a model where content providers can get at least 70% of the end-user payments. While operator-independent app stores do offer this, the app market in India is still quite limited. The huge challenge for these stores lies simply in the collection of money.

There are a few parameters along which this problem needs to be solved. The first is the collection of small tranches of money (Rs 150, say), at a collection cost of no more than 10%. This isn’t as simple as it sounds: Most Indians do not have credit cards and don’t use their debit cards, and some may not even have bank accounts. The lowest common denominator is cash, so what is needed is something similar to a cash conveyor belt.

The second issue is to be able to pay 70% of payments to publishers, and still somehow be able to run a profitable business with a gross margin of around 20%.

If these can be resolved, the payoffs can be immense: 100 million users, say, who are willing to pay Rs 50-100 per month for mobile data services. But other than mobile operators, nobody has figured out the problem of collecting and billing small amounts of money.

What India needs now, therefore, is an alternative microbilling service and an open publishing platform to drive the emerging mobile data ecosystem. In those spaces will lie the biggest set of opportunities for intermediaries, for content providers, for software developers, and for entrepreneurs.